Three more brokerages might be facing Japan’s financial regulator’s scrutiny into how Additional Tier 1 (AT1) bonds of Credit Suisse were sold. According to product explanatory materials seen by Bloomberg, SBI Holdings, Rakuten and Monex, three of the country’s largest online brokerages in Japan, sold the bonds to investors.

Japanese Investors Lost $1B to AT1 Wipe Out

In early March, the rival Swiss bank, UBS agreed to acquire Credit Suisse, which nearly crumbled in the wake of the recent banking crisis in the United States, Finance Magnates reported. As part of the deal, which was arranged by the Swiss government, the Swiss Financial Markets Supervisory Authority (FINMA) ordered the write-off of about $17 billion of Credit Suisse’s AT1 bonds to increase the troubled bank's core capital.

The move sent shivers across the global financial markets, causing Credit Suisse’s AT1 holders in Japan to lose about 140 billion yen ($1 billion). Clients of Mitsubishi UFJ Morgan Stanley Securities accounted for the biggest losses.

In response, the Japan Securities Dealers Association said it was querying its members about the sale of the AT1 bonds to Japanese investors. However, new documents obtained by Bloomberg show that the three leading brokerages offered the bonds to their clients at a minimum purchase amount of $200,000.

The revelation raises questions about whether the brokerages properly informed their clients about the risks associated with the debt instrument. An SBI spokesperson told the outlet that it considered the product characteristics of the Credit Suisse convertible securities before offering them for sale. Additionally, the brokerage said it offered the bonds only to customers it deemed suitable, and only after its sales team had engaged such an investor about the facility.

Furthermore, while Rakuten told Bloomberg that it is reviewing and inspecting its sales activities and explanatory materials, Monex declined to comment on the matter.

Bloomberg reported its review of the relevant documents, prepared by the brokerages for buyers of the bond, had revealed none of the documents mentioned that the AT1 bond would be completely written down if certain ‘viability’ events, such as strong public sector support, occurred.

However, in details shared with investors, Monex and Rakuten indicated that investors’ funds would be ‘reduced’ should Credit Suisse’s common equity tier 1(CET1) drop below 7%. Conversely, SBI told its investors that the entire amount will be lost in such a situation.

The CET1 ratio is a calculation that shows the financial strength of a banking institution. A higher ratio indicates that a lender is more likely to be able to endure financial shocks and remain solvent.

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